Option Volume Heats Up on These 2 Battered Biotechs

INCY and VRTX hit new lows, sending option volume soaring

by Kirra Fedyszyn

Published on Jan 28, 2016 at 1:02 PM
Updated on Jun 24, 2020 at 10:16 AM

Biotech stocks are mostly lower today -- despite some notable exceptions -- keeping the Nasdaq Composite's (COMP) gains in check. Two drugmakers suffering heavy losses are Incyte Corporation (NASDAQ:INCY) and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) -- both on the short-sale restricted list, and both attracting notable options activity.

INCY is 13.4% lower at $64.92, on news that it has stopped a mid-stage study of its treatment for metastatic colorectal cancer. Since the announcement, the stock has received no fewer than six price-target cuts from analysts, and the shares earlier hit an annual low of $64.51.

Action in the options pits is exploding, with contracts changing hands at 19 times their typical intraday rate. Calls are the options of choice today, outnumbering puts 2-to-1, and accounting for eight of the 10 most active options. Interestingly, most of the action is attributable to some kind of spread in the December 2016 series, with 2,000 contracts traded at the December 75 and 100 calls, as well as the December 55 put.

Incyte Corporation (NASDAQ:INCY) has been falling hard for more than a month, losing 40.1% of its value in 2016. But 11 out of 12 analysts still call the security a "strong buy," and the consensus 12-month price target of $121.23 is nearly twice INCY's current price. If today's losses lead to downgrades or more price-target cuts, selling pressure could lead the shares to lower lows.

VRTX also found a new yearly low today, at $81.98, and was last seen down 5.4% at $87.50, as traders and analysts pan the company's quarterly earnings report and guidance. At least seven brokerages lowered their price targets on the stock, the lowest coming from Cowen and Company, at $95.

However, it looks like some options traders are expecting a short-term rebound. Calls are trading at twice the average intraday pace, with potential buy-to-open action at the February 95 call -- most active so far. By purchasing the calls to open, the buyers expect VRTX to claw atop $95 by the close on Friday, Feb. 19, when front-month options expire.

Today's preference for calls is highly unusual for VRTX. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 7.36 indicates more than seven VRTX puts were bought to open for each call over the last two weeks. Moreover, this ratio is higher than 97% of all readings from the past year.

After spending most of 2015 trending higher, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) turned sharply south in 2016, and has shed 30.4% so far this year. Just over half of analysts rate the stock a "buy" or better, so more negative notes could be ahead, potentially exacerbating selling pressure.

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